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That actually isn't strictly true; you could loan out that 900, which gets spent by the person you loaned it to, and can then could be redeposited by the person
by anewaccountname 19y ago
That actually isn't strictly true; you could loan out that 900, which gets spent by the person you loaned it to, and can then could be redeposited by the person who sold him something, in the same bank. And this can be repeated up until it asymptotes off, which (from memory), with a 20% reserve requirement, would occur at $5000. You can do the math on your own for a 10% reserve (I'm guessing it happens at $10,000, which minus the original $1000 is the author's $9,000).
- michaelneale 19y agosorry for the meta comment: but the above comment thread is why I think news.YC is the greatest at the moment. Compare this sort of conversation to reddit, or anything really. Doesn't compare.
- ashu 19y agofascinating. thanks for your insight.
- admoin 19y agoRight, that assumes the proceeds of the loan are redeposited into the banking system. If instead the money remains in circulation or is otherwise kept in physical form, the multiplication stops.
- maximilian 19y agoIts a geometric series. In math: Let r=(1-reserve requirement) and Total = 1000 * sum(1-r^n,n=0,infinity) = 1000 * 1/(1-r) Now I'm probably wrong with my indices because I'm a little confused about connecting my infinite sum to people running around at the bank. If I plut in .8 for r (the same as the comment above used, I get 1/(1-.8)=5, or $5,000 so I'm right that far. For 10% its: 1/(1-.9) = 10 or $10,000. So the author is right in numbers, but arguing against this would be ridiculous. How could any bank guard against this? Why would they want to?
- anewaccountname 19y agoI didn't say a bank would want to guard against this; I just said that a 10% capital requirement isn't really a 10% capital requirement.
- dreish 19y agoThe author has since added an italicized paragraph explaining that this is what he meant to write, but I think the original wording crosses the line from shortcut into misleading, because by the time it will have "the right to lend $9,000 to other people", the bank will have had $10,000 in deposits, not $1000.
- danteembermage 19y agoWhat's really fun is that you can do this with anything, e.g. lawnmowers. I might own one, I lend it to Bob. Now how many lawnmowers are in circulation? Certainly I own one, I have an IOU for one lawnmower. And of course Bob owns one, he's mowing his lawn. If I swap out my lawnmower IOU for some cheesecake and a Tijuana Brass LP, now I'm creating currency and inflating the money supply, since really anything can be currency, ask all those people swapping around cell phone minutes. I think this is confusing for currency because the IOUs look so much like the real thing.